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ENERGY Inventories and imports are clogging the OCTG pipeline

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Revenue from oil country tubular goods (OCTG) has been down for some U.S. companies, although many producers expect the situation to improve as high customer inventories decline.

Operating earnings from tubular products at Pittsburgh-based U.S. Steel Corp. fell 42.4 percent from $177 million in the same period last year.

"Despite the U.S. rig count at near-record levels and good end-user demand, high inventory levels have dampened demand from our oil country distributors," John P. Surma, U.S. Steel's chairman, president and chief executive officer, said during a conference on the company's first-quarter results. "We have reduced our OCTG production and shipments to ensure our operations maintain balance with our order book."

Also notching declines was Dallas-based Lone Star Technologies Inc., which reported $245.1 million in revenue from oilfield products in the first quarter, down 14 percent from $285.1 million a year earlier. "While first-quarter 2007 average natural gas spot prices improved about 4 percent from the fourth quarter of 2006, distributors remained cautious with their OCTG purchases and our OCTG shipment volumes remained essentially unchanged," said Rhys J. Best, Lone Star's chairman and chief executive officer.

First-quarter demand for small-diameter energy tubular products was lower than a year earlier, David Sutherland, president and chief executive officer of Ipsco Inc., Lisle, Ill., commented on his company's performance. However, "we expect shipments to improve as inventories at service centers and distributors reach desired levels."

Sutherland also discussed the possibility of filing a formal trade complaint against Chinese shipments of tubular products. "And I don't think that's unique to Ipsco in terms of the domestic tubular space, whether in energy or other types of tubular products," he said.

John Tulloch, Ipsco's chief commercial officer and executive vice president of steel, warned that U.S. companies expanding into the U.S. spiral-welded tubular products market might be building more capacity than the market can support. "This is a very periodic market, and we happen to be in an upbeat right now," he cautioned.

A late freeze and early thaw made for a sharply lower rig count because equipment couldn't operate on the soft, unstable ground, said Butch Mandel, executive vice president of Concord, Ontario,-based Welded Tube of Canada Ltd.

Making matters worse, new federal tax laws in Canada have made income trusts, which often are a chosen vehicle for investing in oil and gas holdings, less desirable for investors. "Much of the tax advantage was taken away," Mandel said.

Chinese pipe imports also are a major concern, he said. "Inventories have swelled as a result, and North American producers are finding it harder and harder to move their products."

What's more, partly because of the high cost of oilfield services, many companies have chosen to redeploy to oil sands in western Canada, Mandel said. The sands are more like mining operations than drilling, and consequently require less pipe and tube. "There's some reasonable discipline in pricing, but there's no question that it's off," he said.

However, more rigs will be able to return to work as the ground firms up again in late June and July, Mandel said. "I think things will get better in the second half of the year."

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